Owner's Spouse with no compensation maximized 2019 deferrals

Small plan with two owners and a hand full of eligible employees.

Owners' wives were each provided a $19,000 deferral in early 2019.  I just received the company's 2019 payroll information, and neither of the spouses received any income for the year.

How to correct?  Forfeit their deferrals (and earnings)?

Thanks!

Interesting. How did they defer if there was  no compensation? Was it actually deducted from their  paycheck? Did the plan accept a contribution that was not deducted from a paycheck? 

Looking forward to the replies -- similar to a plan I have -- the wife and 2 daughters of the owner, who do NOT work for the company at all, ever, are given a salary and their deferrals are maxed out at the end of the year  as well as the employer contributions.  But that is a little different from your scenario where they don't have any income.

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The owners of the business earn nearly a million dollars.  My guess is that they just threw company revenues into their wives' accounts to give them a little savings.  The wives were not on the company payroll, so there is nothing to defer from.

In your situation you have fraudulent salaries.  I would carefully address the seriousness of the fraud in your situation, and refer the client to their CPA.

Either way, I am leaning toward forfeiting.  But since these are potentially prohibited transactions I'm digging to see if there's a little more involved.

1 hour ago, Towanda said:

The owners of the business earn nearly a million dollars.  My guess is that they just threw company revenues into their wives' accounts to give them a little savings.  The wives were not on the company payroll, so there is nothing to defer from.

In your situation you have fraudulent salaries.  I would carefully address the seriousness of the fraud in your situation, and refer the client to their CPA.

In both situations I believe we have prohibited transactions.  I think yours is a little more serious.

Either way, I am leaning toward forfeiting.  But since these are potentially prohibited transactions I'm digging to see if there's a little more involved.

Ironically, it's the CPA who does the  payroll for my client.  The wife and 2 daughters get W2s for their no-show jobs and the deferrals are made for them and the owner (also a W2 employee)  in one contribution at the end of the year. 

In your situation, forfeiting is probably the way to go.  

3 hours ago, Towanda said:

Small plan with two owners and a hand full of eligible employees.

Owners' wives were each provided a $19,000 deferral in early 2019.  I just received the company's 2019 payroll information, and neither of the spouses received any income for the year.

How to correct?  Forfeit their deferrals (and earnings)?

Thanks!

I think this can be self-corrected as an "Excess Allocation" under Rev. Proc. 2019-19 sec. 6.06(2). You would remove the money from the spouses' accounts and put it in an unallocated* account. No further employer contributions may be made until the money in the unallocated account is allocated to participants.

*The unallocated account is similar to a forfeiture account but is not actually forfeiture. For example, true forfeitures may be used to pay plan expenses, but this unallocated account may not.

2 hours ago, ratherbereading said:

Ironically, it's the CPA who does the  payroll for my client.  The wife and 2 daughters get W2s for their no-show jobs and the deferrals are made for them and the owner (also a W2 employee)  in one contribution at the end of the year. 

Look for a new CPA?

Thank you! 

You you have the stomach for asking the CPA to explain why he/she should not be reported to an appropriate professional or regulatory authority and the take appropriate action based on what you hear?

Things have taken a dark turn.  Let's turn back a bit.  The IRS is unlikely to challenge compensation to an owner's wife of less than $30,000 as unreasonable even if the only work is "pillow talk advisory" in nature.  But I agree, it sounds like an excess that must be corrected.  Unless the last payroll was an error and it should be re-run in which case maybe it isn't an excess at all!

It’s not obvious that the CPA described in ratherbereading’s example violated a professional-conduct rule.  Not knowing the scope of the CPA’s engagement, it’s possible—even if the employer paid wages for no work—that the CPA correctly performed her engagement.

Hence asking for the explanation.

You don’t really think the inquiry would be framed by presumption of wrongdoing.

21 hours ago, Peter Gulia said:

It’s not obvious that the CPA described in ratherbereading’s example violated a professional-conduct rule.  Not knowing the scope of the CPA’s engagement, it’s possible—even if the employer paid wages for no work—that the CPA correctly performed her engagement.

The CPA just takes direction from the owner re. pay for the owners 3 ghost relatives.

12 hours ago, ratherbereading said:

The CPA just takes direction from the owner re. pay for the owners 3 ghost relatives.

Hmmmmmmm, communicate directly with government employees much?